This document is proposing a new structure for operating all generation activities on the Churchill River in a way that includes the transactional purchase and sale of power, the upgrades to Churchill Falls plant and the development of Gull Island, all as already agreed in the Definitive Cooperation and Implementation Agreement (DCIA) but doing so within a new corporate operational structure that is set out below and which addresses the unacceptable control issues currently embedded in the DCIA.
The current GNL is heading down a road that, if it continues, will not be in the best interest of the province and its people. While with the best of intentions, the new DCIA has resulted in text that is unfortunately not what is best for Newfoundland & Labrador.
To start, the new DCIA has 2 main contextual parts as follows:
- The purchase and sale of a product (in this case electrical power); together with the further development of additional capacity.
- Control and power over the seller that goes far beyond normal and is quite restrictive on the sellers operations (in this case NLH and GNL)
After reading the document, I had the thought that what is happening here is similar to the current much larger issue that is happening between the USA/Trump and Canada. In other words, Trump is not satisfied to just purchase our products (Canadian goods and Services), he wants to control us, place restrictions on what we can do and how we operate our own affairs; essentially resulting in Canada giving up sovereignty and we would become a vassal state.
Likewise, Quebec does not seem to be satisfied, just to purchase our power at a better than a fair price (certainly lower than any other alternative they have available), it also wants to control everything about how we run the electrical business in our own province, what we can or can not do, even puts restrictions on certain provincial autonomy and our constitutional provincial powers (a clear sovereignty issue).
In the same way that Canada has stood up against Trump, NL needs to and must stand up against this very unneighbourly control grab by Quebec and the serious control features of this DCIA.
To start, I have no problem with the transactional sale of power to Quebec, at a price that is acceptable to NL … in this case likely below any alternative power source for HQ. I also have no problem agreeing with HQ on CF upgrades and the development of Gull Island … all as currently agreed, price and term period wise, in the DCIA.
WE can not, and our government must not sell us down the river once again and cede all the control features currently embedded in the DCIA. To do so would be the same as the PM ceding Canadian control to Trump.
It is not too late to do the right thing, and I have suggested below a way to do it. This is only my suggestion … there may be others, that would work just as well.
The Strategy / Plan
The province and NLH, need to clearly set out a corporate structure of how it proposes to operate and manage all electrical energy activities on the Churchill River in Labrador going forward. Towards this end, I propose corporate structure set out in the attached Corporate Reorganization Chart.
This chart, would essentially remove the control issues while at the same time enable continuing with the transactional power purchase and future developments as already agreed in the DCIA. These purchase and development agreements would reflect normal and sensible commercial terms and conditions. The new structure would also reflect new commercial relationships which would promote engaging in future deals in Labrador as partners working together. The significant source of conflict and acrimony (namely excessive control) would be eliminated and once and for all we could sit down at the table across from each others as equals and partners … in this case as a willing buyer and a willing seller, ready to come up with a deal that is mutually beneficial.
The Reorganization – The broad steps
I should note at this point, that corporate reorganizations can sometimes be complicated and for most people the underlying steps can be meaningless on their own … you may want to skip the steps and go to the end result which is set out on the Corporate Organization Chart; but here are the broad steps for those who want to go through them:
• The province and NLH should set out the broad corporate structure and policies under which all existing and future operations on the Churchill River will be operated and managed. I am recommending the corporate structure attached.
• Make the decision, that all allocations of volume to NLH must come from the existing plant at CFLco. This will take away the risk that, we the owners of the resource, will not in the future find ourselves exposed to lack of power should for whatever reason, the planned new developments do not get built. Such a situation would be disastrous for the province. This is just an attempt to take away this risk.
• Incorporate a new NLH subsidiary called say “Churchill River Power Authority Inc (CRPA). This new company shall have unlimited authorized capital with 2 classes of shares 1. Common and 2. Redeemable Preferred Shares. My thought is that the preferred shares will have a fixed dividend rate (possibly in the range of 8.5% … to be worked out with the market and reflecting the underlying market risks).
o The preferred shares would be non-convertible and would be listed on the TSE.
o The plan would be that the holders of these preferred shares would be any equity investor(s) other than NLH which would hold 100% of the common shares.
o Likely holders would be HQ, Federal Government, Pension Plans, General Public and Others including possibly foreign investors.
o There maybe other terms attached to those preferred shares for example the right of the class to appoint a representative to the CRPA board.
- The structure on the attached Corporate Organization Chart shows that all generation facilities on the Churchill River (both existing and future) are to be held and operated by wholly owned subsidiaries of CRPA.
- NLH to incorporate a new subsidiary called say “Churchill River Transmission Inc (CRT)
o Transfer to this company all existing Churchill River transmission assets
o All future Churchill River related transmission assets to be acquired or constructed by this company.
- All generation facilities on the Churchill River plus the transmission operations would be operated in wholly owned subsidiaries of CRPA (see Chart). Each of these subsidiaries would have their own senior debt holders.
- All PPA’s would be transactional deals and mainly reflect volumes, pricing, term periods, any renewals and recall rights if needed.
- All agreements and contracts to be subject to Newfoundland and Labrador law.
- NLH would transfer its interest in CFLco to CRPA in exchange for common shares of CRPA.
- NLH would transfer its interest in Muskrat Falls to CRPA for common shares of CRPA.
- NLH would make an offer to HQ that addresses:
o The purchase of power in the overall volumes, at the prices and for the term period and with the recall rights all as agreed in the DCIA
o The offer would address the upgrades and Gull Island development essentially as already agreed in the DCIA.
o The consideration from HQ would be:
All the old agreements would be cancelled including all ancillary agreements and the old Water Rights Lease (between GNL and CFLco) effective on the signing of the new agreements.
HQ would pay to NLH the fees included and agreed to in the DCIA for the opportunity to develop the Gull Island Project. NLH would invest all or a portion of these funds into Gull Island Inc (via CRPA).
HQ would inject its capital for the Gull project in CRPA for Redeemable Preferred shares of CRPA. CRPA would in turn Invest those funds into Gull Island for common shares.
HQ would agree to transfer it’s current interest in CFLco to CRPA for Redeemable Preferred shares of CRPA. This would require a valuation of that interest (independently determined). “Key”… Any final deal with HQ would be conditional on this transfer taking place.
The province and CRPA would enter into a new Water Rights lease covering all the water resources and reservoir territory for the whole Churchill River and catchment area. The terms, price, rates, rentals, royalties etc would be modernized and reflect normal and best practice terms similar to those in other jurisdictions in Canada and around the world.
I would recommend that the GNL commit to reinvesting 50% of the Water Rights revenue into CRPA (via NLH) to be invested by CRPA in a Sinking Funds to be used for future redemption of the Redeemable Preferred Shares. The rights to redemption could be restricted to a 30 day window annually with an appropriate notice period.
Conclusion and Closing
The objective and strategy of this proposed reorganization structure is to provide a basis for the sale of power and the development of other resources on the Churchill River on a normal commercial and transactional basis on the transactional terms regarding volumes, price and term period already agreed to in the DCIA. But the control issued would be handled through the Reorganization structure (see Corporate Organization Chart attached).
The question is … Is HQ looking to buy power or is it interested in controlling the whole Churchill River operations and putting serious restrictions on how we operate the business as well as seriously affecting our provincial sovereignty.
Timing
The reorganization part can start right away … the bulk of the steps are in our own hands
- We can get CRPA incorporated
- We can get new Gull Island entity incorporated
- We can get the CR Transmission entity incorporated
- We can get the transfer of our interest in CFLco transferred to CRPA for common shares done.
- We can get the transfer of Muskrat Falls to CRPA for common shares done
This is our future and if HQ agrees to transfer its interest in CFLco to CRPA for Redeemable Preferred Shares, then great this deal can be put to bed by year-end. If not, then they remain a minority shareholder in CFLco now a subsidiary of CRPA but there would be no PPA and no Development agreements. However, we will have put in place a structure that reflects how we want to operate the whole of the Churchill River activity going forward.
I hope that the GNL considers this seriously. It would be in the province’s best interest plus it would give an opportunity for a good deal for HQ to purchase power and development rights essentially all as already agreed in the DCIA.
Gil Dalton – BA(Econ), BCom, CPA, CA